Can Trump influence the Federal Reserve and lower interest rates?

President-elect Donald Trump plans to reclaim the White House with a bold set of promises, including… Low interest rates.

American families have been frustrated by two years of… High borrowing costs. But the president does not have the ability to reduce Mortgage ratesOr credit card APRs or business loan rates. Interest rates result from a range of economic factors, including the monetary policy of the Federal Reserve.

The Federal Reserve – the country’s central bank – began gradually lowering its benchmark interest rate during the fall. The Fed’s main decision-making body meets again next week, with another quarter percent cut expected on the agenda.

While Trump will have the power to appoint a new Fed head in 2026, he does not have the ability to set monetary policy or change the federal funds rate directly.

There is a long history of presidents trying to interfere with central bank independence. During Trump’s first term as president He threatened to fire Federal Reserve Chairman Jerome Powell After the Fed started raising interest rates. Most recently, the president-elect said he would not try to fire Powell before the end of his term as Fed chairman in 2026.

Here’s a breakdown of what Trump can and can’t do regarding interest rates and the Fed.

Who sets interest rates?

The Federal Reserve sets the federal funds rate, which is the benchmark interest rate that banks pay to borrow money. This target interest rate range indirectly affects the short-term rates that banks and lenders will later charge customers on everything from credit cards to home and auto loans.

The Fed lowers and raises interest rates to keep prices relatively stable (with an ideal annual inflation rate of 2%) and a low unemployment rate, according to peter C Earle, Chief Economist at the American Institute for Economic Research.

To understand how this works in practice, think about the early days of the COVID-19 pandemic. When the economy was collapsing in 2020, The Federal Reserve cut interest rates to zerohoping to encourage spending and investment at a time when people and businesses are hesitant. And then, when the economy rebounded two years later, The Fed raised interest rates to address rapid inflation.

What is the relationship between the Fed and the government?

Federal Reserve Created by Congress in 1913 With the Federal Reserve Act. Congress can amend the law to change the way the Fed operates.

The President’s primary relationship with the Fed is through his authority to appoint the Fed Chairman and other board members. Presidents often appoint Fed board members who align with their worldviews. Sarah Bender, a political science professor at George Washington University, said the appointments are being made in phases so that no president has the power to completely reshape the Fed.

In theory, Trump could push for changes to the Federal Reserve Act through a Republican-controlled Congress. However, Binder said any amendments to the rules governing the Fed would need a bipartisan coalition of 60 votes to pass the Senate.

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What the president can do	What the president cannot do
Appointment of a new Fed Chairman in 2026 (and appointment of the Fed Chairman’s board members at large when their terms expire)	Federal Reserve Chairman fired over minor disagreements. Fed chairs can only be removed “for cause,” such as misconduct or wrongdoing.
Express your concern about monetary policy by publicly criticizing the Fed’s actions.	Determine interest rates directly for the country or banking institutions.

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What power does Trump have over the Fed?

In 2018, during his first term, Trump’s eye Current Federal Reserve Chairman Jerome Powell. Two years later, Trump called him an “enemy.”Powell’s term expires in 2026, and the president likely will not have the authority to fire Powell before then. When asked in early November whether the president could fire or demote the Fed chairman or other Fed governors, Powell replied: “It is not permitted under the law.” the law.”

According to Earle, Fed members can only be removed “for cause,” which means proof of misconduct, wrongdoing or inability to do the job as a result of illness. Simple disagreements over policy or presidential frustration over interest rates are not enough on their own. “Those are not valid grounds for removal,” Earle said.

Presidents have another, albeit informal, power over the Fed: the bully pulpit. Some presidents are known to attack the Fed when the economy is bad, pressuring them to take one action or another. Trump himself did this during his first term by threatening to fire the head of the Federal Reserve when the economy nearly collapsed in March 2020. Experts agree that Trump is likely to make these kinds of comments again.

“I don’t think anyone expects presidents, especially during the day, to tie their hands completely behind their backs,” Bender said.

Is the Fed truly nonpartisan and independent?

In theory, the Fed is independent, but in practice, this is not always the case. According to Earle, it is almost impossible for an entity as important as the Fed to be completely above politics.

The Fed has several structures that insulate it from outside influence: long terms for board members, staggered timelines for appointments, and expectations of removal for cause, for example. All of these things allow the Fed some independence and protect it from the whims of political leaders.

But ultimately, the Fed operates in the middle of the political system. “It can’t be sealed,” Bender said.

How will Trump’s policies affect future interest rate cuts?

Experts say Trump’s broader economic policies are unlikely to lead to faster or deeper interest rate cuts. In fact, it may have the opposite effect.

Trump’s proposals to impose tariffs on foreign imports would likely cause more inflation, which could then influence the Fed to raise interest rates again as it often does to combat inflation, according to Dean BakerChief Economist at the Center for Economic Policy and Research.

But experts say Trump’s biggest impact may be the massive uncertainty he inspires, which could rattle financial markets. His freewheeling political pronouncements often rattle policymakers who do not know exactly which direction he might take. Trump’s threats to fire Powell, regardless of whether he follows through (or can) carry it out, only adds instability to the mix.

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